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Markets barely optimistic about this week’s trade talks between the U.S. and China in Beijing. (AP Photo/Richard Drew) photo credit: ASSOCIATED PRESS

An official delegation of six U.S. cabinet members is now in Beijing to discuss how to proceed on trade during the 90-day truce period. No one in the market is getting their hopes up.

“I don’t think this week puts an end to tariffs, but I do think the trade talks will be positive,” says Craig Birk, chief investment officer for Personal Capital, an $8 billion asset manager in San Francisco. “Both sides need something good to come out of this.”

Commerce Secretary Wilbur Ross told CNBC’s Squawk Box this morning the trade war was hurting China more than the U.S., a line often repeated by President Trump. He did not predict any sort of outcome. Instead, Ross said that tariffs were leading to unemployment in China. Chinese state-run companies have been furloughing workers early ahead of the Luna New Year in February. Tech companies are laying off, too. China tech has been the one powerhouse of the economy, but last week Baidu CEO Robin Li said “winter is coming” in reference to an economy reeling from a combination of economic reforms and new trade restrictions. Ross said Beijing faced a “binary set of decisions” to avoid more tariffs when the current ceasefire ends in March.

This week’s delegation is being led by Ambassador Jeffrey Gerrish, deputy U.S. Trade Representative under China hawk Robert Lighthizer. Other officials come from key sectors of the economy that have been hit by tariffs, namely agriculture and energy.

American business leaders in China have been at a loss to come up with a solution to the crisis. For years, they have taken what amounts to a wait-and-see approach to Beijing policy, hoping for more market access and stricter rules regarding intellectual property rights. They’ve gotten little movement on either. Some key sectors remain closed to foreigners, including financial services. For example, Visa and Mastercard have less than a 5% market share, combined, in China. The credit card payments category is totally dominated by UnionPay, the largest credit card services firm in the world.

Companies are also concerned that their technologies are being lifted by partner firms, only to be remade in other factories as new competition. Foreign firms have little recourse in challenging IP theft in the courts.

“If I could predict what will come out of this week’s meetings I could make a killing in the market. I would like to see this game of chicken come to an end,” says Ravin Gandhi, CEO of GMM Nonstick Coatings, a chemicals company used in home appliance brands like Kitchen Aid. Many of their products are used in China. “I’d like to see Xi (Jinping) and Trump make a deal everyone believes is a deal and not just another move on the chessboard,” he says.

Members of a U.S. trade delegation arrive at a hotel in Beijing, China, on January6, 2019. The delegation led by deputy U.S. trade representative Jeffrey D. Gerrish arrived in the Chinese capital ahead of trade talks with China. (AP Photo/Ng Han Guan) photo credit: ASSOCIATED PRESS

Beyond the political realm, the real effect of the trade war is being felt by companies in the S&P 500.

Last week, Apple spooked everybody when CEO Tim Cook blamed China for its weak sales numbers. After the dust settled, few investors were convinced that China was fully to blame for Apple’s revision. But everyone is convinced that the Chinese economy is slowing. The trade war makes things worse.

Meanwhile, China has tariffs on around 85% of what it imports from the U.S. The U.S. has tariffs on nearly $300 billion worth of China imports. The bulk of them are taxed at 10%. The trade war truce stopped Trump from raising the tariff to 25%. That threat is still on the table, however. There’s also the remaining threat of tariffs on another $200 billion worth of goods coming from China.

“Rather than slowing down trade flows, this has just made goods more expensive, and we’ve seen a widening of the trade deficit with China,” says Cailin Birch, global economist at the Economist Intelligence Unit. “China would like to see these tariffs come down,” she says, agreeing with Ross that China has been the most impacted by the tariffs. The Shanghai and Shenzhen stock exchanges are down over 20% in the last 12 months. The Deutsche X-Trackers China CSI-300 (ASHR), a fund holding mainland Chinese equities, is down 30.5% in the last year. The MSCI China Index is in better shape and is down 25.13%.

Markets will move on any signs of trade progress. This could come in the form of new agreements on market access for financial services and energy deals like liquified natural gas. Announcements of new legal frameworks giving American companies the right to challenge IP theft in higher courts is also a positive. China seems to be heading in that direction.

“I don’t know how optimistic I am about this,” says Gandhi. “When I look at Lighthizer and (Trump China advisor) Peter Navarro, two guys who spent their entire careers obsessed with China, I have a hard time being an optimist,” he says. “Then I look at Xi Jinping. He is a strongman who was groomed for this moment for decades. I think we have an unmovable object against an irresistible force. The only reason why I would be remotely optimistic is because Trump said massive deals were coming. If they don’t come, then he owns this and the market won’t trust him on China anymore.”

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